Contract types

The ultimate profitability checklist

Cost plus vs. fixed price for construction projects

Check out our comprehensive guide to help you confidently determine which contract type is the best fit for your jobs.

Cost plus vs. fixed price:
How to choose the best fit for your business

Are you considering which construction contract to use for your next project?
Let us help make the decision easier.

Choosing between a cost plus or fixed price contract is actually one of the most crucial steps in ensuring profitability on a job. If you’re not using the right contract type, you’re probably losing out on some serious cash that could be in your pocket.

For builders, selecting the appropriate contract model can mean the difference between maximizing financial gain and facing financial challenges.

By aligning your contract model with your typical project requirements and overall business objectives, you can mitigate risks, enhance client satisfaction and ultimately, drive success.

In this guide, we’ll define the differences of cost plus and fixed price contracts, explore the pros and cons and provide a profitability checklist that’ll help you determine the best option.
Pros and cons
Cost plus vs. fixed price

Let’s explore the difference between these two contract types and how to go about choosing the right one for your construction projects.

What is a cost plus contract?

With cost plus contracts, clients agree to pay the builder for the actual costs of construction, plus an additional fee or percentage for profit and overhead. This model provides transparency, as clients have visibility into the actual expenses, and it allows for flexibility in adjusting project scope or materials during construction.

Flexible

Transparent

What is a fixed price contract?

A fixed price contract sets a predetermined total price for the project, which includes all construction costs and the contractor’s profit margin. This model offers clients certainty regarding project costs from the start, minimizing financial risks and uncertainties.

Minimizes risk

Financial certainty
What are the pros and cons of cost plus and fixed price?

There are advantages and disadvantages to both types of contracts. When considering the pros and cons, it really comes down to three main considerations: Budget, profit and risk.
Cost plus

Budget

Pro: There’s more transparency for clients when it comes to project expenses.

Con: There’s uncertainty surrounding the total project cost. Clients pay for the actual costs of construction, so unforeseen expenses or project delays can lead to budget overruns.

Profit

Pro: There’s potential for higher profits if costs are managed efficiently. Profit margins are tied directly to project costs, allowing builders to earn more using markups.

Con: Builders aren’t able to determine their total profit amount up front.

Risk

Pro: There’s more transparency when it comes to unexpected costs on a project, so clients aren’t surprised.

Con: More of the risk is shifted to the client, which can lead to disputes if expectations are not clearly defined.

Fixed price

Pro: Fixed price contracts provide budget certainty for clients with the total project cost being predetermined and agreed upon up front.

Con: If unforeseen expenses arise or if there are delays, builders may face financial losses if they’re not able to complete the project within the agreed-upon budget.

Pro: Builders have the opportunity to negotiate a fixed profit margin up front.

Con: Builders lose the potential for higher profits compared to cost plus contracts where profit margins are tied directly to project costs.

Pro: Clients have peace of mind knowing the financial risks are lower, and they can see their total cost up front.

Con: The majority of the risk from cost overruns and project delays fall on the builder.
Cost plus

Fixed price

Budget

Pro: There’s more transparency for clients when it comes to project expenses.

Con: There’s uncertainty surrounding the total project cost. Clients pay for the actual costs of construction, so unforeseen expenses or project delays can lead to budget overruns.

Profit

Pro: There’s potential for higher profits if costs are managed efficiently. Profit margins are tied directly to project costs, allowing builders to earn more using markups.

Con: Builders aren’t able to determine their total profit amount up front.

Risk

Pro: There’s more transparency when it comes to unexpected costs on a project, so clients aren’t surprised.

Con: More of the risk is shifted to the client, which can lead to disputes if expectations are not clearly defined.

Budget

Pro: Fixed price contracts provide budget certainty for clients with the total project cost being predetermined and agreed upon up front.

Con: If unforeseen expenses arise or if there are delays, builders may face financial losses if they’re not able to complete the project within the agreed-upon budget.

Profit

Pro: Builders have the opportunity to negotiate a fixed profit margin up front.

Con: Builders lose the potential for higher profits compared to cost plus contracts where profit margins are tied directly to project costs.

Risk

Pro: Clients have peace of mind knowing the financial risks are lower, and they can see their total cost up front.

Con: The majority of the risk from cost overruns and project delays fall on the builder.

Contract checklist

Profitability checklist: Discover which contract is right for the job

Now that you’ve reviewed the pros and cons, review this checklist with three sets of criteria to help determine whether cost plus or fixed price contracts are right for your construction projects.

Note:

If you notice that your projects are more complex, cost plus is most likely the best fit. On the other hand, if your jobs are less complicated, you should consider fixed price.

Tips for success

Understanding the project

Assess the existing conditions and any project potential constraints.
Involve key stakeholders to gain insight into their expectations.
Break down the project into manageable phases and tasks.
Leverage project management software and scheduling tools to streamline project planning and communication.

Project complexity and scope
Scope of work:	Technical requirements:
Is the scope of work well-defined or is it subject to potential changes and additions?	Are there any technical challenges or specialized construction methods required for the project?
Are there any unique or specialized requirements that may impact project costs or timelines?	Does the project involve coordination with multiple trades or subcontractors with specific expertise?
Job site conditions:	Regulatory compliance:
Are there any site-specific challenges or environmental factors that may affect construction activities?	Are there any regulatory or permitting requirements that could impact project timelines or costs?
Does the project require extensive site preparation or remediation work?	Does the project involve compliance with specific building codes or zoning regulations?

Project complexity and scope
Scope of work:
Is the scope of work well-defined or is it subject to potential changes and additions?
Are there any unique or specialized requirements that may impact project costs or timelines?
Technical requirements:
Are there any technical challenges or specialized construction methods required for the project?
Does the project involve coordination with multiple trades or subcontractors with specific expertise?
Job site conditions:
Are there any site-specific challenges or environmental factors that may affect construction activities?
Does the project require extensive site preparation or remediation work?
Regulatory compliance:
Are there any regulatory or permitting requirements that could impact project timelines or costs?
Does the project involve compliance with specific building codes or zoning regulations?

Tips for success

Setting expectations

Take time to understand your client’s specific needs, objectives and budget constraints.
Clearly explain the differences between fixed price and cost plus contracts.
On cost plus contracts, be transparent about pricing components, including labor, materials and profit margins.
Showcase the value-added services and benefits associated with each pricing model.
Honor pricing commitments and deliver on promised services and outcomes.
Use client feedback to refine pricing strategies, improve service delivery and enhance client satisfaction.

Client preferences and risk tolerance
Schedule flexibility:	Client expectations:
Is there flexibility in the project schedule to accommodate potential delays or changes in scope?	What are the client’s expectations regarding project transparency, cost control and communication?
Are there any time-sensitive factors, such as seasonal constraints or client deadlines?	How will the chosen contract type align with the client’s preferences and objectives?
Client involvement:	Budget contraints:
How involved is the client in the decision-making process and project management?	Does the client have a fixed budget for the project or is there flexibility in adjusting costs as needed?
Does the client have clear expectations regarding project deliverables and quality standards?	Are there any funding limitations or financial considerations that need to be addressed?
Change management:	Risk assessment:
Is there a formal process in place for managing changes to the project scope or specifications?	What are the potential risks and uncertainties associated with the project, such as material shortages, labor availability and unforeseen site conditions?
How will change orders be addressed, and what impact will they have on project costs and timelines?	How will these risks be managed and mitigated throughout the project lifecycle?

Client preferences and risk tolerance
Schedule flexibility:
Is there flexibility in the project schedule to accommodate potential delays or changes in scope?
Are there any time-sensitive factors, such as seasonal constraints or client deadlines?
Client expectations:
What are the client’s expectations regarding project transparency, cost control and communication?
How will the chosen contract type align with the client’s preferences and objectives?
Client involvement:
How involved is the client in the decision-making process and project management?
Does the client have clear expectations regarding project deliverables and quality standards?
Budget contraints:
Are there any site-specific challenges or environmental factors that may affect construction activities?
Are there any funding limitations or financial considerations that need to be addressed?
Change management:
Is there a formal process in place for managing changes to the project scope or specifications?
How will change orders be addressed, and what impact will they have on project costs and timelines?
Risk assessment:
What are the potential risks and uncertainties associated with the project, such as material shortages, labor availability and unforeseen site conditions?
How will these risks be managed and mitigated throughout the project lifecycle?

Tips for success

Recognizing potential risks

Identify potential risks and uncertainties that may impact market dynamics, such as geopolitical tensions, natural disasters or economic downturns.
Develop a strategic plan and risk mitigation strategies to address unforeseen challenges and protect against market volatility.

Market conditions and competition
Economic conditions:	Competitive landscape:
What are the current macroeconomic indicators such as GDP growth, inflation rates and interest rates that will influence construction activity and investment?	What does the competitive landscape look like? Identify key competitors, their market share, strengths, weaknesses and strategic positioning.
What are the local and regional economic trends?	Supply chain dynamics:
Population growth and demographics:	What is the current availability and cost of construction materials, labor and subcontractors within the market.
What are the population growth rates and demographic shifts that are increasing demand for construction services, such as residential housing or infrastructure development?	Are there any supply chain disruptions, such as material shortages, trade tariffs or labor shortages, that may impact project costs and timelines?
Government policies and regulations:	Industry outlook:
What are the current government policies, regulations and incentives? (i.e. infrastructure spending, building codes, zoning laws and environmental regulations)	What industry forecasts, market reports and emerging trends are shaping construction demand and preferences?
	Which technological advancements, sustainability initiatives and regulatory changes are influencing construction practices and project requirements?

Market conditions and competition
Economic conditions:
What are the current macroeconomic indicators such as GDP growth, inflation rates and interest rates that will influence construction activity and investment?
What are the local and regional economic trends?
Competitive landscape:
What does the competitive landscape look like? Identify key competitors, their market share, strengths, weaknesses and strategic positioning.
Population growth and demographics:
What are the population growth rates and demographic shifts that are increasing demand for construction services, such as residential housing or infrastructure development?
Supply chain dynamics:
What is the current availability and cost of construction materials, labor and subcontractors within the market.
Are there any supply chain disruptions, such as material shortages, trade tariffs or labor shortages, that may impact project costs and timelines?
Government policies and regulations:
What are the current government policies, regulations and incentives? (i.e. infrastructure spending, building codes, zoning laws and environmental regulations)
Industry outlook:
What industry forecasts, market reports and emerging trends are shaping construction demand and preferences?
Which technological advancements, sustainability initiatives and regulatory changes are influencing construction practices and project requirements?

Project value
Know the value of your work and price accordingly

Strategic pricing is important because it helps builders ensure profitability. By developing and implementing pricing strategies that align with your business objectives and market analysis, you can achieve revenue growth. Conducting thorough cost analysis, estimating project expenses and evaluating profit margins are critical for successful project management.

8 tips to improve project pricing

Break down costs into categories

Organize project costs into categories, such as direct costs (i.e. materials, labor) and indirect costs (i.e. overhead, permits, contingencies).

Account for material and labor costs

Estimate labor costs based on labor rates, productivity rates and hours required for each task. Then research material prices, suppliers and delivery costs to help determine material expenses and account for potential price fluctuations.

Consider equipment costs

Include costs associated with equipment rental, maintenance, fuel and depreciation when estimating project expenses.

Account for overhead

Calculate overhead costs – such as administrative expenses, insurance, taxes and general company overhead – and allocate them proportionally to project costs.

Apply profit margin

Add profit margins to the total project cost to ensure profitability and cover business expenses, risks and return on investment.

Use estimating software

Leverage construction estimating software to streamline cost analysis, improve accuracy and enhance productivity.

Regularly monitor costs

Track actual costs against estimated costs, analyze variances and adjust forecasts accordingly to ensure project profitability and financial performance.
Now, no matter how you build, you can build with Buildertrend

Recent updates to Buildertrend’s project management software make it easier to manage markup and customize options on invoices. We also introduced the new Job Costing Budget that’ll increase transparency and help manage profitability on cost plus jobs. Here’s how our platform helps support both cost plus and fixed price builders.
For builders using cost plus contracts:

Transparency: Provide added transparency into project costs and expenses through the Customer Portal. Allow access to the budget with detailed expense breakdowns and financial summaries to help clients understand the overall cost of their project.

Approvals: Buildertrend is a single source of truth when it comes to change orders, updated pricing, project revisions and documenting homeowner approvals.

Client billing: Customize itemized expenses and provide detailed explanations to facilitate transparent billing. Then allow homeowners to make payments through Buildertrend.
For builders using fixed price contracts:

Budget management: Create detailed budgets for fixed price contracts with the ability to allocate costs, track expenses and monitor budget vs. actuals to ensure financials stay on track.

Project selections: Use the Selections feature to streamline client material choices and upgrades. This helps guide clients through the decision-making process, ensuring every detail of their project aligns with their vision and budget.

Estimates: Use the Estimate feature to create a project roadmap that predicts costs, quantities, labor hours and more. Feel confident knowing the total project cost is accurate.
“We ensure 100% transparency in our processes and financials, making our clients feel secure as well. Loosing financial credibility with homeowners is what a builder’s nightmares are made of. Using the Estimate and Budget features in Buildertrend, tracking numbers regularly and communicating the results to your team and clients are the first steps toward ensuring a successful project.”

Adam Copenhaver
Co-owner of CopeGrand Homes in Charleston, South Carolina

Ensure profitability with Buildertrend

Regardless of which contract you chose – cost plus or fixed price – Buildertrend offers the essential tools you need to ensure profitability for your business. You can accurately track expenses, manage project budgets and monitor profit margins in real-time, enabling informed decision-making and proactive cost management. You have the power to optimize project outcomes, enhance client satisfaction and drive long-term growth and success for your business.

Take the next step and schedule a demo today!

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Download this PDF

The ultimate profitability checklist

Cost plus vs. fixed price for construction projects

Cost plus vs. fixed price:How to choose the best fit for your business

Are you considering which construction contract to use for your next project?Let us help make the decision easier.

Cost plus vs. fixed price

What is a cost plus contract?

Flexible

Transparent

What is a fixed price contract?

Minimizes risk

Financial certainty

What are the pros and cons of cost plus and fixed price?

Cost plus

Fixed price

Profitability checklist: Discover which contract is right for the job

Note:

Understanding the project

Project complexity and scope

Scope of work:

Technical requirements:

Job site conditions:

Regulatory compliance:

Project complexity and scope

Scope of work:

Technical requirements:

Job site conditions:

Regulatory compliance:

Setting expectations

Client preferences and risk tolerance

Schedule flexibility:

Client expectations:

Client involvement:

Budget contraints:

Change management:

Risk assessment:

Client preferences and risk tolerance

Schedule flexibility:

Client expectations:

Client involvement:

Budget contraints:

Change management:

Risk assessment:

Recognizing potential risks

Market conditions and competition

Economic conditions:

Competitive landscape:

Supply chain dynamics:

Population growth and demographics:

Government policies and regulations:

Industry outlook:

Market conditions and competition

Economic conditions:

Competitive landscape:

Population growth and demographics:

Supply chain dynamics:

Government policies and regulations:

Industry outlook:

Know the value of your work and price accordingly

8 tips to improve project pricing

Break down costs into categories

Account for material and labor costs

Consider equipment costs

Account for overhead

Apply profit margin

Use estimating software

Regularly monitor costs

Now, no matter how you build, you can build with Buildertrend

For builders using cost plus contracts:

For builders using fixed price contracts:

Ensure profitability with Buildertrend

Download this PDF

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Tell us a bit about yourself

Cost plus vs. fixed price:
How to choose the best fit for your business

Are you considering which construction contract to use for your next project?
Let us help make the decision easier.